Optimistic Investors Push Hubei Xiangyuan New Material Technology Inc. (SZSE:300980) Shares Up 39% But Growth Is Lacking

The Hubei Xiangyuan New Material Technology Inc. (SZSE:300980) share price has done very well over the last month, posting an excellent gain of 39%. The annual gain comes to 128% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, when almost half of the companies in China's Chemicals industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider Hubei Xiangyuan New Material Technology as a stock not worth researching with its 8.5x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Hubei Xiangyuan New Material Technology

What Does Hubei Xiangyuan New Material Technology's P/S Mean For Shareholders?

Recent times have been advantageous for Hubei Xiangyuan New Material Technology as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Hubei Xiangyuan New Material Technology's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Hubei Xiangyuan New Material Technology would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. Still, revenue has barely risen at all from three years ago in total, which is not ideal. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Looking ahead now, revenue is anticipated to climb by 20% during the coming year according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 24%, which is noticeably more attractive.

In light of this, it's alarming that Hubei Xiangyuan New Material Technology's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Hubei Xiangyuan New Material Technology's P/S Mean For Investors?

Hubei Xiangyuan New Material Technology's P/S has grown nicely over the last month thanks to a handy boost in the share price. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've concluded that Hubei Xiangyuan New Material Technology currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

Before you take the next step, you should know about the 4 warning signs for Hubei Xiangyuan New Material Technology that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.